Total Fair Value Swap

Abstract

A synthetic instrument known as a “Total Fair Value Swap” is disclosed. According to one embodiment, the Total Fair Value Swap may comprise an agreement between two counterparties, a “Fixed Rate Payer” and a “Floating Rate Payer”. According to the agreement, the Fixed Rate Payer makes a stream of payments to the Floating Rate Payer based on a fixed rate, and the Floating Rate Payer makes a second stream of payments to the Fixed Rate Payer based on a floating rate, wherein a first portion of the floating rate is based on a reference interest rate, and wherein a second portion of the floating rate is based on a credit spread associated with the Floating Rate Payer. The reference interest rate may be, for example, London Inter-Bank Offer Rate (LIBOR), prime interest rate, the US dollar swap rate, the U.S. Treasury Bond rate or any other widely traded interest rate that is reset periodically. The credit spread may be observed from the Credit Default Swap (CDS) market.

1 . A computer-based financial system for facilitating a Total Fair Value Swap transaction between a first counterparty and a second counterparty, the system comprising:
 means for interfacing the first and second counterparties to the system and for accessing and monitoring data associated with the Total Fair Value Swap transaction;   database means for storing and maintaining records related to the Total Fair Value Swap transaction, the records reflecting the first counterparty's obligation to make one or more fixed payments to the second counterparty and the second counterparty's obligation to make one or more floating payments to the first counterparty, wherein the one or more fixed payments are based on a reference interest rate and the one or more floating payments are based at least in part on a credit spread associated with the second counterparty;   rate monitoring means implemented by a processor for deriving the credit spread from a credit default swap market and for periodically determining the floating payment amount based at least in part on the credit spread, the rate monitoring means being further operable to determine the fixed payment amount by adjusting the reference interest rate on a periodic basis; and   transaction management means, operatively coupled to the means for interfacing, the database means and the rate monitoring means, for tracking the one or more fixed payments and the one or more floating payments.   
     
     
         2 . The system according to  claim 1 , wherein the reference interest rate is determined based on one or more interest rates selected from a group consisting of:
 London Inter-Bank Offer Rate (LIBOR);   prime interest rate;   U.S. dollar swap rate;   U.S. Treasury Bond rate; and   federal funds rate.   
     
     
         3 . (canceled) 
     
     
         4 . The system according to  claim 1 , wherein the floating payment amount is determined based on a floating rate comprising a first portion and a second portion, wherein the first portion is determined based on an interest rate unrelated to the credit spread, and wherein the second portion is determined based on the credit spread. 
     
     
         5 . The system according to  claim 4 , wherein the second portion is determined based on a predetermined percentage of the credit spread. 
     
     
         6 . The system according to  claim 5 , wherein the predetermined percentage causes a net present value of the Total Fair Value Swap transaction to be zero at initiation of the Total Fair Value Swap transaction. 
     
     
         7 . The system according to  claim 1 , wherein the transaction management means enforces a maximum amount for the one or more floating payments if the credit spread is above a predetermined level. 
     
     
         8 . The system according to  claim 1 , wherein the transaction management means cause at least a portion of the Total Fair Value Swap transaction to terminate upon one or more triggering event associated with the second counterparty or a third party. 
     
     
         9 . A computer-based financial system for facilitating a Total Fair Value Swap transaction between a first counterparty and a second counterparty, the system comprising:
 a transaction management processor, a rate monitor, and a database, and a network interface device;   the database maintaining an electronic record related to the Total Fair Value Swap transaction, the record reflecting the first counterparty's obligation to make one or more fixed payments to the second counterparty and the second counterparty's obligation to make floating payments to the first counterparty;   the transaction management processor being configured to:
 calculate an amount for each fixed payment based on a reference interest rate determined by the rate monitor, 
 derive, based on information retrieved by the rate monitor from a credit default swap market, a credit spread associated with the second counterparty at a specified time prior to each floating payment, 
 determine, based on each derived credit spread, an amount for each floating payment, such that the amount for each determined floating payment varies when the derived credit spread of the second counterparty varies, and 
 manage receipt of the one or more fixed payments and the floating payments, where managing comprises at least one of confirming, recording, and scheduling of the fixed and floating payments; 
   wherein the transaction management processor is coupled to the network interface device, the network interface device allowing at least one counterparty to access and monitor data associated with the Total Fair Value Swap transaction.   
     
     
         10 . (canceled) 
     
     
         11 . (canceled) 
     
     
         12 . (canceled) 
     
     
         13 . (canceled) 
     
     
         14 . (canceled) 
     
     
         15 . (canceled) 
     
     
         16 . (canceled) 
     
     
         17 . (canceled) 
     
     
         18 . (canceled) 
     
     
         19 . (canceled) 
     
     
         20 . (canceled) 
     
     
         21 . The system of  claim 1 , wherein the first counterparty either manages the system or has administrative privileges associated therewith. 
     
     
         22 . The system of  claim 21 , wherein the first counterparty monitors the credit spread associated with the second counterparty. 
     
     
         23 . The system of  claim 22 , wherein the first counterparty monitors the floating payment amount based upon data provided by the rate monitoring means. 
     
     
         24 . The system of  claim 1 , wherein the second counterparty either manages the system or has administrative privileges associated therewith. 
     
     
         25 . The system of  claim 24 , wherein the second counterparty monitors the reference interest rate associated with the first counterparty. 
     
     
         26 . The system of  claim 25 , wherein the second counterparty monitors the fixed payment amount based upon data provided by the rate monitoring means. 
     
     
         27 . The system of  claim 1 , wherein two or more distinct entities comprise the first counterparty to the Total Fair Value Swap. 
     
     
         28 . The system of  claim 27 , wherein a third party either manages the system or has administrative privileges associated therewith. 
     
     
         29 . The system of  claim 1 , wherein two or more different entities comprise the second counterparty to the Total Fair Value Swap 
     
     
         30 . The system of  claim 29 , wherein a third party either manages the system or has administrative privileges associated therewith.